CPL & PA6: destock still the main topic before Aug

Cautious trade and high inventory

The current nylon 6 chip and filament market are in a very representative state: prices keep range-bound, downstream go bargain hunting when prices wave to a relatively low rate, and sales/production ratio is temporarily stimulated but in most of the time not ideal. And compared with polyester filament, the periodical sales boom in nylon market is less frequently, with shorter cycles and less regularity.

This has pointed out to the fact that caution is the current state of mind in the downstream, and it is closely related to the recent general environment. There are indeed some macro risks that need to be guarded against. For example, when will the US Fed tightening signal, which is the most concerned, appear? And the U.S. employment data in the near term is better than expected, the inflation has risen significantly, so the exit from Quantity Easing seems to be just around the corner.

However there is no need to be too bearish on caprolactam, when its cost support is strong, as crude oil and benzene prices are rising firmly through June. Besides, demand is still healthy or robust even in some areas. For instance, cord fabrics and films of the bright conventional spinning (CS) chip application fields are still high-yielding, and some of the fine denier and dull product of the high-speed spinning (HS) chip field are in short supply. Therefore, it is inappropriate for the market outlook to be too optimistic or pessimistic, and on the operational level, it is not suggested for players to keep empty stock or full stock either.

Based on the above factors, the “reducing the inventory” that is currently being called for in all links is not strictly speaking of a reduction at all cost and dimensions, but more a measure of reasonable control. Then, to what extent will it be considered reasonable? This may vary from enterprise to enterprise and industry to industry. Still, in terms of the overall or average level of the industry, the current inventory in caprolactam, nylon 6 chip and filament sectors is high.

Sector wise inventory status, and plants’ effort to destock CPL plants have taken quick steps in June

Total CPL inventory (in CPL plants, traders, and nylon 6 chip plants) has been elevated to almost 210kt by the end of May, which is a high rate in the absolute sense. And the inventory in CPL plants is relatively moderate, while much higher in nylon 6 chip plants.

CPL plants have taken measures to deal with the stock problem. Since June 10, there is evidently an increasing number of CPL plants cutting down or closing production. Fangming (Dongming Risun), Yangmei, Luxi Chemical and Shenma have cut down their production to different degrees, while Risun and Yangmei have planned a long period of major turnarounds. The average operating rate of CPL plants have dropped from 92% to 77% in just one week.

Before Hualu Hengsheng is going to launch the new capacity, spot CPL market will be tight. Besides, according to plant survey, during this period, the operating rate of nylon 6 chip plants is likely to be steady in general. CPL inventory is expected to be reducing continuously during June-July.

Figure 1. CPL plant operation changes in June

Nylon 6 chip inventory in HS and CS chip plants

The above chart shows the inventory development in nylon 6 high-speed spinning (HS) chip and nylon 6 conventional spinning (CS) chip plants in the past 6 months. The 2-3 weeks stock rate is quite high for this industry, which means pressure on sell side and growing risks for the future.

Nylon 6 CS chip plants have been actively reducing their operating rate and at the same time promoted sales actively to liquidate their stocks, and have achieved mild result in end-May. CS chip plants are likely to maintain the low-capacity operation in the coming months and the average inventory may go slowly down as well.

Stock pressure has been apparently higher in nylon 6 HS chip plants. As mentioned in the insight “Nylon 6 HS chip: latest chance of destock in June”, most of the inventory was semi-dull chips, and dull chip supply was still tight. And semi-dull HS chip plants were switching production from semi-dull to dull chips, and they have become more willing to promote sales in the spot recently. In these ways of controlling stock, stock rate in HS chip plants may be gradually kept down from end-June to end-July.

According to the current assessment of market status of chip plant and future risk control, it is generally believed to be ideal that the stock rate will be reduced by half from current around-20-day rate. Nevertheless, this standard can change according to the changes of various factors, but there is no doubt that the general direction of reducing product inventory is at least the same.

To sum up the inventory development in CPL, nylon 6 CS and HS chip sectors, the expected ideal status of destock may come by end-July or August, with market fundamentals remaining largely the same and no overwhelming external influences happening. Before that time line, both CPL and nylon 6 chip plants will still put DESTOCK as their priority.